AMR-US Airways Merger Seen by U.S. as Squeeze on Fliers

Bringing together AMR Corp.’s American Airlines and US Airways Group Inc. would only add to the clout enjoyed by competitors such as United Airlines, with the squeeze on consumers’ pocketbooks greatest in markets where American and US Airways compete head-to-head, the Justice Department said. Photographer: Mike Fuentes/Bloomberg

Aug. 13 (Bloomberg) -- Passengers booking flights to and
from Dallas, Washington and Charlotte, North Carolina, face
higher fares and fewer flights under the proposed American
Airlines-US Airways Group Inc. merger.

Concern that prices would rise across a range of markets
was central to the argument made today by the U.S. Justice
Department to block the $14 billion transaction. The planned
combination is the biggest in a wave of tie-ups winnowing the
ranks of major U.S. carriers to just five now from nine in 2005.

Bringing together AMR Corp.’s American and US Airways would
only add to the clout enjoyed by competitors such as United
Airlines, with the squeeze on consumers’ pocketbooks greatest in
markets where American and US Airways compete head-to-head, the
Justice Department said.

“This last merger in an unprecedented consolidation phase
may be one merger too many,” said Vaughn Cordle, a partner with
aviation market-research firm Ionosphere Capital in Clifton,
Virginia. “This would result in the highest concentration this
industry has seen.”

Direct competition by American and US Airways would be
eliminated on nonstop service on 17 domestic routes generating
about $2 billion in annual industrywide revenue, creating
“strong incentives for the merged airline to reduce capacity
and raise fares,” the U.S. complaint stated.

Hearing Delay?

The lawsuit comes just 48 hours before AMR was set to go to
U.S. Bankruptcy Court in Manhattan to ask Judge Sean Lane to
confirm its reorganization plan. Lane probably will delay the
confirmation hearing until late September or early October, said
Anthony Sabino, a specialist in airline bankruptcy who teaches
law at St. John’s University in New York.

The late maneuver stunned analysts and investors,
triggering a selloff that dragged the 10-carrier Bloomberg U.S.
Airlines Index down 5.7 percent for the biggest decline since
April. US Airways fell the most, tumbling 13 percent to $16.36.

A merged American would become the world’s largest airline
by traffic, topping United Continental Holdings Inc.’s United,
and would be able to raise ticket prices without risk of being
undercut by competitors, the Justice Department said.

“Passengers to and from the Washington, D.C., area are
likely to be particularly hurt,” the agency said in the
complaint. US Airways now has 55 percent of the takeoff and
landing slots at Washington’s Reagan Airport, a proportion that
would rise to 69 percent under the merger, the Justice
Department said.

‘Action List’

“That’s the kind of thing that’s going to be Item A on the
action list” for antitrust regulators, Sabino said.

Routes from Dallas-Fort Worth International Airport,
American’s home hub, and Charlotte, a US Airways hub, were among
those cited in the Justice Department complaint as among those
where “the merger is presumptively illegal.”

The government used an index used that tracks airline
concentration on a market-by-market basis. Among flights between
major airports, the routes with the highest scores were
Charlotte-Dallas and Dallas-Philadelphia, giving them an index
value almost four times the threshold for a market to be
considered “highly concentrated,” the Justice Department said.

AMR, now the third-largest U.S. airline, and No. 5 US
Airways vowed to fight the Justice Department lawsuit.

Airlines’ Response

“The DOJ is wrong in its assessment of our merger,” the
airlines said in a statement that focused on the expanded route
system at a combined carrier and didn’t mention fares.
“Blocking this procompetitive merger will deny customers access
to a broader airline network that gives them more choices.”

Allowing US Airways and American to combine would give the
three biggest full-service carriers -- a merged American, United
and Delta Air Lines Inc. -- and discounter Southwest Airlines
Co. control of more than 80 percent of the domestic market,
according to the Justice Department.

Cordle said his study of market concentration shows the
clout enjoyed by the largest carriers would be similar to their
control before the U.S. airline market was deregulated in 1978.

The prospect of further consolidation shrinking industry
seating capacity and buoying fares helped send U.S. carriers to
their best rally to start a year since the creation of the
Bloomberg U.S. Airlines Index in 2000. That gauge soared 49
percent in 2013 through yesterday.

Airfare Increases

While the Justice Department focused on the prospect of
future price increases, the industry has struggled to charge
more for tickets this year.

Airlines have succeeded in two of eight attempts at broad-based increases in 2013, travel website FareCompare.com found.

That compares with an average 62 percent success rate from
2007 to 2012, the data show. Last year, airlines were able to
raise fares 47 percent and the rate was 41 percent in 2011,
Dallas-based FareCompare said.

Airlines are now more dependent on ancillary fees such as
charges for checked bags and rebooking tickets, which added more
than $6 billion in 2012 revenue for U.S. carriers, according to
the U.S. Bureau of Transportation Statistics. After adjusting
for inflation, the average U.S. round-trip fare last year was
$378, down from a peak of $456 in 2000, government data show.

Fuel Fallout

Michael Boyd, president of aviation consultant Boyd Group
International Inc. in Evergreen, Colorado, said higher prices
for jet fuel are to blame for rising fares. At $3.02 a gallon
yesterday, fuel cost more than triple the 2000 rate.

“This argument that this would gouge the public -- the DOJ
should have thought about that” while approving other recent
mergers, Boyd said.

Daniel McKenzie, a Buckingham Research analyst based in New
York, said in a note to clients that he now assesses the
merger’s success as only a 40 percent probability, down from 50
percent.

“At a minimum, the DOJ move could be a posturing move to
extract carve-outs from US/AA,” McKenzie wrote. “At most, it
reflects a philosophical bias against further consolidation in
the industry.”